The Wages of Sin Taxes

e Wages of Sin Taxes Christopher Snowdon Adam Smith Institute 2012 !e Wages of Sin Taxes Executive Summary 1. Governments have long relied on indirect taxes on consumer goods as a source of revenue. ‘Sinful’ items such as alcohol and tobacco have traditionally been taxed punitively and some have called for new taxes on fatty foods and sugary drinks, as well as a minimum price on a unit of alcohol. 2. Campaigners and politicians often cite astronomical figures as being the ‘cost to the taxpayer’ of certain products, but these statements have no foundation in economics. e studies which produce these figures are dominated by ‘costs’ which are neither financial nor borne by the taxpayer. ey include hypothetical estimates of the value of a life year lost, earnings forgone due to premature mortality and expenditure by the consumer on the product itself. ese figures are usually inflated, but even when they are plausible they cannot be used to justify sin taxes because these ‘costs’ affect only the individual; they are not paid by the taxpayer. 3. It is frequently claimed that consumers of ‘unhealthy’ products place an excessive burden on public services— healthcare, in particular—and that this justifies additional taxation in order to (a) reduce consumption of the sinful product, and (b) reimburse the state for the extra money it is forced to spend. is is not true. ere is ample evidence that, on average, smokers and the obese are less of a ‘drain on public services’ than nonsmokers and the slim because they spend fewer years withdrawing pensions, prescriptions, nursing home provision and other benefits. eir lifetime healthcare costs are usually lower than those who lead ‘healthy lives’. If making consumers pay their way is truly the aim of public policy, the government would be more justified in placing a tax on fruit and vegetables. 2 !e Wages of Sin Taxes 4. e case of alcohol differs from that of tobacco and ‘unhealthy’ food in so far as there are additional externalities relating to violence, drink-driving and property damage. It is likely that drinking and drunkenness result in additional costs to the public purse which are not offset by savings and benefits, but these are covered by existing alcohol taxes with several billion pounds to spare. Just as smokers are subsidising nonsmokers, so drinkers are subsidising teetotallers. 5. As instruments of social engineering, sin taxes are blunt tools which are largely ignored by the target group while creating a range of unintended consequences which damage health, stoke criminality and, beyond a certain point, lead to the government receiving less tax revenue. ey are a costly and inefficient means of attempting behavioural change. 6. Taxing goods which are price inelastic, especially those which are addictive, is far more likely to impoverish consumers than it is to turn them into abstainers. Alcoholics are rarely deterred from drinking by higher prices and there is evidence that tobacco taxes are now so high that further increases will yield diminishing returns. Many studies have concluded that ‘fat taxes’ and ‘soda taxes’ have little or no effect on rates of obesity. Such levies are better seen as stealth taxes than sin taxes. 7. Like virtually all indirect taxation, sin taxes hit the poor harder than the rich. Taxes on tobacco, sugar-sweetened drinks and ‘junk food’ are doubly regressive because they are disproportionally consumed by people on lower incomes. Placing a minimum price on alcohol would be extraordinarily regressive since it would deliberately target drinks which are consumed by the poor while leaving the drinks of the rich untouched. 3 !e Wages of Sin Taxes 4 !e Wages of Sin Taxes Introduction “e art of taxation consists of so plucking the goose as to obtain the most feathers with the least possible amount of hissing.” —Jean-Baptiste Colbert Pianos, yachts, playing cars, medicine, alcohol, tobacco, beards, windows, carbon dioxide, lap dancers, airline tickets, petrol, salt, chocolate and tea. All and more have been taxed by impecunious governments; some because they are luxuries, others because they are essential. Commodities which are considered sinful or unhealthy traditionally attract the heaviest duties and it is these that are the focus of this paper. In particular, we shall look at the current bête noires of public health: alcohol, tobacco, sugar and fat. We shall call those who consume them ‘the sinners’ and those who abstain from them ‘the saints’. e duties levied for the good of our physical and moral well-being we call ‘sin taxes’. It is easy to assume that sin taxes, like all other taxes, exist to raise money for the government and history gives us little cause to dismiss that assumption. Sin taxes have a uncanny habit of being imposed when politicians need to find cash quickly, particularly during wars. Beer duty increased tenfold in Britain during the First World War and rose sharply again during the Second World War. e USA fought both World Wars, the Civil War and the War of 1812 on the back of alcohol taxes. In 5 !e Wages of Sin Taxes Germany, taxes on cigarettes rose dramatically during the Second World War, particularly in the later years, until they made up 80 to 95 per cent of the price of a pack.1 Fiscal shortfalls during peacetime are just as likely to inspire taxes on vice. In 1791, George Washington introduced a tax on whiskey as a means of solving the fledgling US government’s debt problem (it was swiftly followed by the Whiskey Rebellion). Two centuries later, Britain’s Conservative government introduced a tax escalator on cigarettes to recoup some of the billions it had wasted trying to shore up sterling on Black Wednesday. In 2008, when the Labour Chancellor Alistair Darling had a credit crunch to tackle, taxes on tobacco, alcohol and petrol were the first to rise (unlike in the USA, the use of motor fuel has long been regarded as a minor sin in Europe). In so doing, Darling honoured the long-standing British tradition of turning the screw on smokers and drinkers when times are tough. Prior to the First World War, more than a third of all government revenue in both Britain and the USA came from duty paid on drink and tobacco. Faced with his own budget deficit in 2009, Barack Obama raised the federal cigarette tax by 156 per cent, despite having promised a year earlier that “no family making less than $250,000 a year will see any form of tax increase.”2 Largely as a result of the president’s U-turn, the federal government’s sin tax revenue—including tobacco, alcohol, guns and ammunition— leapt from $14 billion in 2008 to over $20 billion.3 As the recession deepened, state governments raised taxes on petrol, tobacco, soda and bottled water.4 Colorado started taxing sweets, Texas introduced a tax on lap dancing clubs (the “pole tax”) and several states contemplated a tax on pornography (the “skin tax”).5 In Phoenix, Arizona, a 2 per cent tax on all food was levied to help pay off the city’s $277 million debt, but when the policy encountered opposition from citizens, politicians considered taxes on tattoo parlours, strip clubs and escort agencies instead.6 Meanwhile in Europe, Denmark and 6 !e Wages of Sin Taxes Hungary became the first countries in the world to introduce a ‘fat tax’ and, in 2012, France began levying a tax on sugar sweetened beverages. Politicians appealed to public health concerns to get these measures through, but with a tariff of just one cent per bottle, the French soda tax seemed more of a stealth tax than a sin tax. e remarkable correlation between sin taxes and budget shortfalls suggests either that politicians become unusually puritanical when times are tough or that they see sinners as a ready source of cash. e evidence that austerity breeds morality is scant indeed. On the contrary, fiscal constraints are more likely to blind lawmakers’ eyes to vice than to fill them with moral indignation. As early as the sixteenth century, the profligate, debt-ridden Pope Leo X was taxing prostitution, something Nevada is still contemplating in 2012. In 1964, America’s first state lottery was established in New Hampshire as a means of repaying government debt without raising taxes.7 In 2011, Washington DC became the first US jurisdiction to legalise (and, of course, tax) online gambling. California’s decision to discuss marijuana legalisation in 2010 was unashamedly inspired by the state’s crippling budget deficit. Prohibition itself was ended primarily because the government could no longer afford to keep alcohol revenues in the hands of gangsters once the Great Depression began. Various US states and several EU countries have recently been accused of lowering alcohol and tobacco duties to lure in their neighbours. ese actions do not betray an overt concern for health and purity over base financial considerations. Occasionally, a bona fide zealot will use sin taxes to register his heartfelt disapproval if he feels unable to enact total prohibition. In 1604, King James I raised tobacco duty by 4,000 per cent in a bid to stamp out a habit which he described as “loathsome to the eye [and] hateful to the nose”.8 His ideological descendent Michael Bloomberg, Mayor of New York City, has been on a crusade against tobacco ever since he gave up 7 !e Wages of Sin Taxes a 60-a-day habit. When he increased the tax on a pack of cigarettes from 8 cents to $1.42 in 2002, he announced: “If it were totally up to me, I would raise the cigarette tax so high the revenues from it would go to zero.”9 He has since jacked the tax up to $4.35 per pack, so we should hesitate before questioning his sincerity, but the revenues continue to pour in whether he is sincere or not.

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